Transition finance in the debt and investments markets

In October 2025, the Guide to Transition Loans (the "Guide") was published by the major loan markets associations. In November 2025, proposals to amend the Sustainable Finance Disclosure Directive (“SFDR 2.0”) were published, including the introduction of “Transition Finance” as a label for investments in financial products. 

The Guide and the SFDR 2.0 proposals introduce more clarity on what constitutes transition finance in the loan markets and in the context of investment products respectively, introducing, for the first time, a dedicated, cross-jurisdictional framework for transition loans and transition finance investments. This blog explores the key elements of the Guide and its practical implications for loan documentation and structuring as well as the outlook for the transition finance investment products.

The Guide to Transition Loans

The Guide builds on themes explored in our earlier blog on transition finance — namely the need to move beyond binary “green / non-green” classifications and to focus instead on credible, science-aligned pathways for real-world decarbonisation (see our previous blog here).

From “financing the transition” to labelled transition loans

The Guide makes a clear distinction between:

• “Financing the transition” – the broad mobilisation of capital, labelled or unlabelled, across the economy; and
• “Transition finance” – transaction-level instruments that are specifically designed to support credible decarbonisation over time by focussing on the borrowing entity (e.g. in the form of sustainability-linked loans, which are provided for general corporate purposes and commit a borrower to taking transition steps in its overall business) or on the asset or project being financed (e.g. where the “use of proceeds” of the loans are applied towards a project or asset that meets transition finance criteria).

The Guide is firmly focused on the concept of transition finance, discussing both sustainability-linked loans and use of proceeds loans. 

The Guide defines transition finance as comprising the following components:

• alignment with Paris Agreement compatible objectives  supporting the decarbonisation of the real economy;
• avoidance of carbon lock-in and stranded asset risks;
• benchmarking of impacts and trajectories against credible science-based pathways;

and adds that “use of proceeds” transition finance loans should also feature the following:

• a demonstrable or meaningful contribution to real-world emissions reductions, prioritising actual reductions in GHG emissions rather than relative reductions;
• application of “Do No Significant Harm” safeguards to other environmental and social objectives; and

absence of low carbon alternatives that are technically and/or economically viable in the local context of the activity.

Entity level credibility as a core component of transition loans

A core component of the Guide is its emphasis on credible entity level transition strategies. At the entity level, transition finance should focus on the credibility of a borrower's GHG emission reduction strategy, encompassing its commitments, practices and performance across past, present and future timeframes.

The Guide provides two pathways for demonstrating credibility: 

• a robust formal transition plan setting out the entity’s targets, actions and resources for its transition towards a lower-carbon economy, which plan or planning process is typically science-based and aligned with recognised international and national frameworks; or
• where a (public) transition plan is unavailable, a robust set of transition indicators serving as a proxy for a robust formal transition plan, with such indicators drawing on disclosures, governance arrangements, CapEx and R&D allocation, technology adoption milestones and engagement across the value chain.

Importantly, the Guide recognises that transition pathways are non-linear, diverse and context-specific. What is credible for one sector, geography or borrower may not be appropriate for another. This pragmatic approach is particularly relevant for SMEs and borrowers in emerging markets.

Transition loans and sustainability-linked loans: complementary tools

The Guide confirms that sustainability-linked loans (SLLs) remain a fundamental element of transition finance for supporting entity-level efforts, particularly where ambitious key performance indicators (KPIs) and sustainability performance targets (SPTs) are aligned with GHG reductions and science-based benchmarks.

What is new - and particularly significant - is the introduction of the Transition Loan Principles (Exposure Draft) for use-of-proceeds transition loans. These principles address a long-standing gap in the market: how to label and structure loans that finance transition activities which are not yet “green” or ‘sustainability-linked’, but are nonetheless essential to achieving net zero.

The Transition Loan Principles: a new use-of-proceeds framework

The Transition Loan Principles mirror the familiar structure of the Green Loan Principles and are built around five core components:

1. Entity-level transition strategy which may provide the necessary context to ensure that a specific projects meaningfully contributes to the entity’s overarching GHG emissions reduction strategy;
2. Use of proceeds for eligible transition projects, being assets, investments and other related and supporting capital and/or operating expenditures such as R&D that are not yet aligned with the goals of the Paris Agreement but contribute meaningfully to the decarbonisation of the real economy, with it being noted that transition loans may finance such full transition projects or individual components thereof (such as CapEx, OpEx, R&D, and/or phase-out related expenditures) that are integral to a broader decarbonisation strategy;
3. Process for project evaluation and selection, with the entity supporting its lenders the rationale and governance behind the selection, including (i) a description of the processes used to determine the project as a credible transition project, including alignment with applicable roadmaps, pathways and taxonomies, (ii) an assessment of technically and/or economically feasible low carbon alternatives, (iii) an overview of how environmental and social risks are managed and (iv) an assessment of carbon lock-in risks
4. Management of proceeds so as to maintain transparency and promote the integrity of the transition loan product; and
5. Reporting, including on the use of proceeds and expected and achieved climate impacts of the transition projects to which funds have been allocated, including the contribution to the entity’s broader transition strategy.

What this means for borrowers and lenders

For borrowers, the Guide provides a clear roadmap for accessing labelled transition finance without overstating the “greenness” of their activities. However, it also raises the bar on governance, disclosure and strategic coherence.

For lenders, the Guide offers a practical framework to assess transition risk and opportunity, while supporting portfolio alignment with net-zero objectives and managing reputational and regulatory risk.

The Transition Loan Principles are currently in exposure draft form and are expected to evolve over the coming months as market practice develops. Nevertheless, the Guide already represents a meaningful step towards greater consistency and integrity in transition finance. 

Transition Finance investments under SFDR 2.0 proposals

Transition finance will receive a further boost under current proposals for SFDR 2.0, the proposed revisions to the Sustainable Finance Disclosure Regulation, published on 20 November 2025. 

One of the proposals introduces a new investment product category for “transition finance” under a new article 7 SFDR 2.0. In order to qualify for a “transition finance” label, the financial products must invest at least 70% in “transition-aligned” investments measured using appropriate sustainability-related indicator, while strict exclusions apply for fossil fuel, coal and certain other investments. 

An investment is considered “transition aligned” if, in short, (i) (in the case of a portfolio) it replicates or is managed in reference to an EU climate transition benchmark or EU Paris-aligned benchmark, (ii) it is made in certain taxonomy-aligned economic activities, (iii) is made in undertakings or economic activities with credible transition plan for at least one sustainability factor at the level of the undertaking or activity, (iv) is made in undertakings or economic activities with credible science-based target supported by appropriate information, (v) it supported by a credible sustainability-related engagement strategy targeting specific changes with defined milestones, (vi) it has a credible portfolio-level transition target, such as reductions of GHG emissions or (vii) the investment in the undertaking, economic activity or asset otherwise credibly contributes to the transition, provided that is properly justified and included in relevant disclosures. 

Disclosure of principal adverse impacts (PAIs) under SFDR is mandatory, also in respect of “transition finance” products, although the requirements are somewhat less burdensome under SFDR 2.0.

The proposals by the EC will undergo the usual EU legislative process and will need to be completed by level 2 measures, including in relation to implementation of indicators, exclusions, reporting and disclosure. Adoption of the new SFDR 2.0 framework is to be expected in the course of 2027. Transitional arrangements may not apply to all currently outstanding or newly developed financial products that are within scope of the SFDR. Entities subject to SFDR should thus monitor how their investment products may need to be re-labelled under SFDR 2.0. 

In conclusion, with the important transition finance developments discussed in this blog, investors and financiers on the one hand and investees and borrowers in transition towards net zero on the other hand have a useful compass and guide as to how to structure their investments and loans in line with transition finance expectations and future requirements.

If you have any questions regarding the above, please contact Niek Groenendijk or Marieke Driessen of our Stibbe Financial Markets team.